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Sun Pharma: Taro consolidation boosts sales

Jun 1, 2011

Sun Pharma has announced its fourth quarter results for 2011 (4QFY11). The company has reported 35.5% YoY and 12.2% YoY increase in sales and net profits respectively. Here is our analysis of the results.

Performance summary

Sales increase by 35.5% YoY in 4QFY11. This is primarily due to inclusion of Taro's (subsidiary's) financials into the consolidated statements of Sun Pharma and better performance of branded domestic sales.

Operating margins shrink by 8.4% YoY during the quarter owing to increase in employee costs and other manufacturing costs (as percentage of sales).

Net profits increase by mere 12.2% YoY due to low operating margins and higher base effect due to low taxes in the same quarter previous year

Board recommends a dividend of Rs 3.5 per share (dividend yield of 0.8%).

Financial performance: A snapshot

(Rs m)

4QFY10

4QFY11

Change

FY10

FY11

Change

Net sales

10,801

14,633

35.5%

40,074

57,214

42.8%

Expenditure

6,616

10,197

54.1%

26,446

37,543

42.0%

Operating profit (EBDITA)

4,185

4,436

6.0%

13,628

19,672

44.3%

EBDITA margin (%)

38.7%

30.3%

34.0%

34.4%

Other income

137

1,108

707.3%

2,053

2,727

32.8%

Depreciation

419

482

14.9%

1,533

2,041

33.1%

Profit before tax

3,903

5,062

29.7%

14,148

20,358

43.9%

Minority Interest

-29

612

-41

913

Tax

-13

22

679

1,284

89.3%

Profit after tax/(loss)

3,945

4,427

12.2%

13,511

18,161

34.4%

Net profit margin (%)

36.5%

30.3%

33.7%

31.7%

No. of shares (m)

1035.7

Diluted earnings per share (Rs)

17.5

Price to earnings ratio (x)

26.5

What has driven performance in 4QFY11?

Sun Pharma's sales increased by 35.5% YoY in 4QFY11. This was primarily due to inclusion of Taro's (subsidiary's) financials into the consolidated statements of Sun Pharma and better performance of branded domestic sales. The domestic formulations sales increased by 20.2% YoY to Rs 5,887 m, higher than the industry growth with strong position in the key chronic therapies. 9 key products were launched during the quarter, taking the total to 39 for FY11. Overall, the company is ranked no. 1 based on share of prescriptions with 6 classes of specialists: psychiatrists, neurologists, cardiologists, ophthalmologists, orthopedics and gastroenterologists.

Revenue break-up

(Rs m)

4QFY10

4QFY11

Change

FY10

FY11

Change

Domestic

Formulations

4,898

5,887

20.2%

17,412

23,801

36.7%

Bulk

117

264

124.5%

958

1,130

17.9%

Others

3

4

57.7%

10

17

59.6%

Total (A)

5,018

6,155

22.6%

18,380

24,947

35.7%

Exports

Formulations

3,911

7,761

98.5%

16,892

28,982

71.6%

Bulk

996

904

-9.2%

4,470

4,082

-8.7%

Others

39

25

-35.7%

66

54

-19.0%

Total (B)

4,945

8,690

75.7%

21,428

33,119

54.6%

Grand Total ((A)+(B))

9,963

14,844

49.0%

39,808

58,066

45.9%

Revenues from the export formulations business almost doubled due to the consolidation effect by inclusion of Taro. Taro recently announced its unaudited financials for the Jan-Mar quarter. Net sales for March quarter stood at US$ 107.7 m, a growth of 21% over same period last year, while the net profit for the quarter stood at US$ 25.7 m, higher by 199% when compared to the same quarter last year.

Operating margins shrank from 38.7% in 4QFY10 to 30.3% 4QFY11, due to a substantial rise in employee costs and other manufacturing charges (as percentage of sales). Again this was due to the inclusion of Taro's financials in the consolidated financial statements.

Net profits increased by mere 12.2% YoY to Rs 4,427 m due to low operating margins and higher base effect due to low taxes in the same quarter previous year. In addition to this, the current quarter did not see any onetime exclusive opportunities that were there in the fourth quarter of the previous year.

In the quarter, ANDAs (abbreviated new drug application) for 8 products were filed by Sun Pharma. With, in FY11, ANDAs for a total of 25 products were filed by Sun Pharma. During this quarter, ANDAs for 2 products from Sun Pharma were approved taking the total approvals to 14 in FY11.

What to expect?

At the current price of Rs 432, the stock is trading at a multiple of 17.6 times our estimated FY13 earnings.

Going forward, Sun Pharma has a strong chronic franchise which will help it grow in the domestic markets. In the US markets, although Caraco is still under the US FDA scanner, sales should pick up keeping in mind the fact that the number of drugs going off patent in that year is considerable. Besides this, the acquisition of Taro has will also enable Sun Pharma to enhance its presence in the highly competitive US market.

Further, Sun Pharma announced the creation of a joint venture with Merck & Co. of the US to develop, manufacture and commercialize new drugs in the branded generics space. On a long term basis, this will help Sun Pharma augment its sales from the semi regulated markets which also enjoy higher margins. Having said that, current valuations do not leave much on the table for investors.

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